DarcieMATHlin1498 DarcieMATHlin1498

27-05-2023
Business

Answered

Chae is valuing a new division and has identified a comparable firm which has an expected return on equity of 10%, an expected return on debt of 4%, and a D/E ratio of 0.3. The asset cost of capital for the new division is 8.62%.
The division is expected to have a FCF of $6M one year from today. The yearly cashflows will increase by 3% per year, forever. Chae intends on keeping a constant D/E ratio of 1.0 for the division. If the division’s debt yield is 4.5% and the corporate tax rate is 40%, what is the PV of the division’s FCFs?

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